Dynamic Pricing in Hotel Industry

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Introduction

A hotel is an establishment that provides basic accommodation at a fee for a given time. Here, clients may rent the accommodation facility to use for their own leisure and freedom. The accommodation facility may come with a bed, a wardrobe, a bathroom and a relaxation stand. Some products like meals may be provided by the hotel staff for the time the client is using the facility (Blonigen & Park, 2001). The hotel industry has experienced a growth over the last few years, and most of this growth is attributed to proper management and customer satisfaction. Hotel owners have taken the initiative to offer competitive services to their customers who include business people and families on holiday on travel. The law in some countries such as Britain requires hotels to serve people with meals and drinks when they are using the hotel facility. Fees paid by hotel clients are the main source of revenue for these hotels and thus they need to satisfy their main financiers through the provision of better service at a reasonable price (Borenstein, Shepard & National Bureau of Economic Research, 1993).

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Dynamic Pricing

Dynamic pricing refers to the contract that exists between the provider of a good or service and the consumer of a service. In this case, the price of the good or service keeps changing according to the time of delivery. Dynamic pricing can also be referred as time based pricing since the price of a good or service keeps changing in reference to the time the good or service is being delivered to the customer (Christ, 2010). Dynamic pricing originates from price discrimination where the price of a certain product could change over time without any factor leading to this change. Many industries have tried to segment their market share through initiating dynamic pricing so as to remain competitive in the industry. Thus, they earn maximum revenue for the service they offer (Capon & Hulbert, 2007). Dynamic pricing is common among the hotel industry where the price of the service being offered varies with time and the quantity of the product being offered. Price variations occur according to economic conditions and the number of customers a hotel facility can accommodate at a given time. This will set the price mechanism to be used (Duffie, 2001).

Demand based pricing refers to when consumers’ responses to various prices of products offered in the market dictates the best acceptable price for the product. Price discrimination is applied in the hotel industry due to market changes and the number of industry players who are involved in the business. The price is arrived at after comparing a range of prices set by the managers of these hotels. Dynamic pricing was introduced in the hotel industry by 2000s and has seen tremendous growth of hotel revenue over the years. However, it faced a lot of resistance from business clients who are very keen on changes in a price. The hotel industry has been using the dynamic pricing to forecast the hotel business, and the amount of revenue it can earn in a given period (Hanson, 1985). The hotel industry is controlled by seasons of high turnover and low turnover in any given year. Therefore, hotel managers should make enough money during peak season in order to remain in business even during the low season (Weber, 2008). Dynamic pricing usually faces resistance from the way hotels control their rates. Thus, they should be transparent in the manner they handle the process. Some improvements have been made concerning dynamic pricing. In this regard, hotel managers are offering their corporate clients some percentage discount instead of the fixed price of their services to their clients. The hotels vary their room rates according to the suite type a client wants and the price will vary accordingly. The prices are usually not fixed, and thus they need to set a favourable price that will not exploit their clients and will not push the hotel out of business at the end. This way, the prices in the hotel industry remain competitive in the long run and profitable to the survival of the hotel industry. Dynamic pricing is also used to offer better service to the customers where a customer may require a special treatment. In this case, he or she has to pay an extra fee to enjoy the service (Sheth & Sisodia, 2006).

Pricing fairness

As a business owner, one may ask him or herself, which is the fairest price to charge for a given product or service on offer in the market? A fair price can be defined as a price set by the supplier or provider of a given product or service in the market for sale. The price should be well accepted by consumers of the product or service and should not cause a loss to the producer (Korth, 2009). A business is started for the sole purpose of making a profit, and a business tries to maximize its revenue by offering a product at a price that will fetch maximum revenue from consumers. On the other hand, consumers of goods and services prefer to maximize their satisfaction at the cheapest cost available (Zajac, 1995). They are also very keen to changes in the price of their favourite products. There should be an agreement between the provider of these products and consumers who purchase these products. This is called a price negotiation, and it is set to reach a fair price that will be fair to the consumers. At the same time, it should be reasonable to the producers of these goods and services (Maxwell, 2007).

Differential pricing

Differential pricing is a method used to offer different prices for a single product depending on the consumer and quantity ordered by the consumer. A single product or service may have different prices depending on whom it is being offered to, and the time it is being offered (Schwind, 2007). Differential pricing is very common in the hotel industry where different kinds of clients exist. The clients offer multiple prices for a single product depending on the mode of payment and time of delivery. Differential pricing is applied to offer different kinds of satisfaction to the different consumers. Customer satisfaction is arrived at when the delivery is made, and the customer makes the payment. It has been used to improve customer satisfaction in the hotel industry as clients receive the required service they can afford (Phillips, 2005).

How the different prices affect customers’ satisfaction

Revenue managers in different hotels have incorporated differential pricing to improve on customer satisfaction, and ensure that the revenue of the business increases over time. When the revenue manager uses different prices, it has different levels of satisfaction for different customers. When high price is charged to the rich, they tend to associate this with high satisfaction. However, when the same is charged to the poor, they feel exploited. Thus, customer needs should be properly understood each customer. Revenue manager can offer better services as the customer may wish. The clients can get maximum satisfaction from what they pay for their service at the hotels. Differential pricing has been used to forecast sales within a given period and help in managing this revenue to cater for the low season turnover. This strategy has helped the hotel industry grow and offer the best service while remaining in the business.

References

Blonigen, B. A., & Park, J. (2001). Dynamic pricing in the presence of antidumping policy: Theory and evidence. Cambridge, Mass: NBER.

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Borenstein, S., Shepard, A., & National Bureau of Economic Research. (1993). Dynamic pricing in retail gasoline markets. Cambridge, MA: National Bureau of Economic Research.

Capon, N., & Hulbert, J. M. (2007). Managing marketing in the 21st century: Developing and implementing the market strategy. Bronxville, N.Y: Wessex Inc.

Christ, S. (2010). Operationalizing dynamic pricing models: Bayesian demand forecasting and customer choice modeling for low cost carriers. Wiesbaden: Betriebswirtschaftlicher Verlag Gabler.

Duffie, D. (2001). Dynamic asset pricing theory. Princeton, NJ [u.a.: Princeton Univ. Press.

Hanson, W.A. (1985). Bandwagons and orphans: Dynamic pricing of competing technological systems subject to decreasing costs.

Korth, C. (2009). Fairness in bargaining and markets. Dordrecht: Springer.

Maxwell, S. (2007). The Price is Wrong: Understanding What Makes a Price Seem Fair and the True Cost of Unfair Pricing. Hoboken: John Wiley & Sons.

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Phillips, R. L. (2005). Pricing and revenue optimization. Stanford, Calif: Stanford Business Books.

Schwind, M. (2007). Dynamic pricing and automated resource allocation for complex information services: Reinforcement learning and combinatorial auctions ; with 53 tables. Berlin: Springer.

Sheth, J.N., & Sisodia, R. (2006). Does marketing need reform?: Fresh perspectives on the future. Armonk, N.Y: M.E. Sharpe.

Weber, W.K. (2008). Dynamic Pricing: Strategies to Grow Profits in the Hospitality Industry of the 21st Century. Frankfurt: Worldhotels.

Zajac, E.E. (1995). Political economy of fairness. Cambridge, Mass. [u.a.: MIT Press.

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